The Honorable Ned LamontGovernor of the State of ConnecticutState
CapitolHartford, Connecticut

Dear Governor Lamont:

I write to provide you with financial statements for the General Fund and the
Transportation Fund through March 31, 2020.

The Office of Policy and Management (OPM) is projecting that the General Fund
will end Fiscal Year 2020 with a deficit of $934.0 million, an increase of
$403.8 million from the April 20th estimate. OPM’s revised projection
incorporates lower revenue estimates to account for the economic impacts of the
COVID-19 pandemic as reflected in the April 30th consensus revenue forecast
reached with the Office of Fiscal Analysis. The consensus forecast also
includes a $325.6 million reduction in federal grant revenue due to an
anticipated delay in Medicaid reimbursements for supplemental hospital payments,
which are now expected to be received in FY 2021.

The projected deficit represents 4.8 percent of General Fund expenditures for
FY 2020. Due to the public health emergency declared on March 10, 2020 and
the critical pandemic measures needed in response, no policy changes are being
offered to mitigate the FY 2020 deficit at this time. OPM notes that,
according to existing state law, the deficit for FY 2020 will be addressed
through a transfer from the Budget Reserve Fund after the close of the fiscal
year.

OPM is projecting that the Special Transportation Fund (STF) will end Fiscal
Year 2020 operations with a $151.7 million deficit, a $15.9 million reduction in
the fund’s operating balance from its April 20th estimate due to changes in the
consensus revenue forecast. The additional revenue reductions are due to lower
oil prices and a decline in gasoline consumption from an increase in telework.
The current projection would leave a positive STF balance of $168.4 million at
year-end.

The following analysis of the financial statements furnished by OPM is
provided pursuant to Connecticut General Statutes (CGS) Section 3-115.

The Office of the State Comptroller (OSC) is in general agreement with OPM’s
General and Transportation Fund deficit projections for FY 2020 and with the
consensus revenue forecast reached with the Office of Fiscal Analysis. At
the same time, the delays in tax filing and payment deadlines create more
uncertainty around these estimates. Therefore, the full impact of the
pandemic on FY 2020 operations may not be known until September 2020.

The current General Fund deficit projection of $934 million is $764 million
larger than OSC’s April 1st estimate and reflects the rapid deterioration of
state revenues due to economic effects of COVID-19. General Fund revenues
are now $975.1 million or 5.01 percent below the original budget plan for FY
2020.

The current revenue forecast includes significant reductions in the
withholding portion of the Personal Income tax, along with decreases in the
Sales and Use Tax and the Corporation Tax. In addition, gambling revenue
estimates were revised downward due to closure of the state’s casinos and a
drop-off in lottery sales. As noted earlier, Federal grants revenue has
been reduced to reflect the delay in Medicaid reimbursement for supplemental
hospital payments. Please refer to Exhibit C for the full General Fund
schedule of estimated and realized revenue for FY 2020.

As more information becomes available, a clearer picture is emerging of the
economic toll of the COVID-19 pandemic, although much uncertainty remains.
Ongoing public health interventions and social distancing measures are still
necessary to fight the further spread of the virus and plans to reopen the
economy must proceed with caution. First, testing needs to become much
more widespread to better track the path of the virus. Similarly, contact
tracing needs to improve so quarantines and social distancing can become more
focused to replace society wide closures. Accurate tests for antibodies
may also need to be developed to identify those who may have immunity and can
safely return to the workplace.

Ultimately, things may not get back to anything approaching normal until an
effective vaccine is developed and widely available to protect the population.
Therefore, Connecticut’s budget situation may continue to get worse before it
improves. My office will continue to monitor the situation closely and
update these projections in future reports.

The statutory revenue volatility cap requires receipts above a certain
threshold to be transferred to the Budget Reserve Fund (BRF). For FY 2020,
the cap is $3,294.2 million for estimated and final income tax payments and
revenue from the Pass-through Entity (PET) tax. If current projections are
realized, a $318.3 million volatility transfer would be made to the BRF.
Due to recent economic disruptions, stock market losses and extensions of
various tax filing deadlines, this projection will need to be revisited as the
fiscal year progresses.

The balance of the BRF presently stands at $2,505,537,507. Adding the
estimated $318.3 million volatility transfer, less the projected FY 2020 deficit
of $934 million would bring the year-end balance of the BRF to approximately
$1.89 billion. This would represent 9.5 percent of net General Fund
appropriations for FY 2021. The state has made enormous progress in
building the BRF balance over the past two years. Now, as the state faces
this unprecedented public health and economic crisis, Connecticut is better
positioned to meet the challenge.

To date four Federal emergency spending bills have been enacted by Congress
that will provide financial resources to combat the corona virus and the
associated economic damage. The most recent, signed into law April 24th,
included additional funding for the national response, such as another $321
billion for the Paycheck Protection Program for businesses, $60 billion in loans
and grants for economic disaster assistance, $75 billion for health care
providers, and $25 billion to increase COVID-19 testing capacity.

In earlier relief bills, many smaller businesses did not receive the paycheck
assistance intended for them. Larger, well connected businesses had the inside
track for the first round of funding, leaving smaller business with the least
amount of cash flow to fend for themselves as the money ran out. The
federal government must ensure that does not happen again and that the funding
for health care providers and testing is spent wisely and targeted to areas with
the greatest needs.

A debate is currently unfolding in Washington DC about whether another relief
bill is needed, as state and local governments struggle to address the pandemic
at a time when revenues are dropping precipitously. The April 30th
consensus revenue forecast illustrates the scope of the problem in FY 2021 and
beyond. The drastic combination of tax increases and spending cuts needed
to close budget gaps of that magnitude would do an immense amount of harm.
Therefore, my office strongly supports the effort to provide revenue assistance
to state and local governments to help maintain vital public services during
this crisis and prevent further damage to the economy.

Connecticut’s budget results are ultimately dependent upon the performance of
the national and state economies. Virtually all economic measures look
back at past periods. In the present situation, therefore, some economic
indicators presented below may appear inconsistent with more recent developments
in the rapidly changing response to the COVID-19 pandemic.

Throughout April, the nation continued seeing historically high levels of
initial unemployment insurance claims. For the week ending April 25th, the
U.S. Bureau of Labor Statistics (BLS) reported that seasonally adjusted initial
claims totaled 3.84 million, bringing the six-week total to 30.3 million.
That level of job losses is enough to wipe out all the nation’s job gains since
the recovery began over a decade ago.

Connecticut has also experienced a sharp increase in job losses. Since March
13th, over 400,000 workers applied for unemployment insurance benefits,
according to the state Department of Labor. This is more than three times
the number of jobs lost during the Great Recession. From unemployment
insurance claims data, DOL is expecting severe job losses in the leisure &
hospitality, healthcare and retail sectors in next month’s report that will
cover April 2020.

In an April 7th report, the Bureau of Economic Analysis (BEA) released Real
Gross Domestic Product (GDP) results by state for the fourth quarter of 2019.
Connecticut experienced a seasonally adjusted annual growth rate of just 0.9
percent, which ranked 44th in the nation overall. This growth rate was
well below both the national average of 2.1 percent and only half of the New
England regional average of 1.8 percent. The percent change in real GDP in
the fourth quarter ranged from 3.4 percent in Washington and Utah to –0.1
percent in West Virginia.

Last week the Congressional Budget Office (CBO) released preliminary
projections of key economic variables based on information currently available
and recent federal legislation addressing the COVID-19 pandemic. CBO
concluded the U.S. economy will experience a sharp contraction in the second
quarter of 2020, including a dramatic decrease in GDP and an increase in
unemployment.

CBO projected inflation adjusted GDP is expected to decline nearly 12 percent
during between the first and second quarters, the equivalent of an annual rate
decrease of 40 percent for the quarter. In addition, the nation’s
unemployment rate is expected to average close to 14 percent during the second
quarter, up from 3.8 percent in the first quarter. While warning these
projections are subject to enormous uncertainty, CBO is expecting economic
activity to increase in the third quarter of 2020 as state and local governments
ease stay at home orders and businesses begin to reopen. However, the
projections also included the possibility of a reemergence of the pandemic.
To account for this possibility, CBO projects social distancing will continue,
although to a lesser degree, through the first half of next year.

The Conference Board reported that the Consumer Confidence Index (CCI)
deteriorated further in April, following a sharp decline in March. The index is
closely watched by economists because consumer spending accounts nearly 70
percent of U.S. economic activity. The CCI now stands at 86.9, down from 118.8
in March and represents the lowest level in nearly six years. In addition,
the present conditions portion of the index dropped 90 points from 166.7 to
76.4, the largest decline on record. The Conference Board reported that
this reflects the sharp contraction in economic activity and surge in
unemployment claims brought about by the COVID-19 crisis.

Prior to the full impact of COVID-related closures, Berkshire Hathaway
HomeServices reported results for the Connecticut housing market for March 2020
compared with March 2019. Sales of single-family homes grew by 7.39
percent, with the median sale price increasing by 8.89 percent. Perhaps
reflecting social distancing efforts, new listings were down 16.32 percent in
Connecticut. However, the median list price rose 11.64 percent to
$279,000. Average days on the market decreased 10.53 in March 2020 compared to
the same month in the previous year (85 days on average compared with 95 in
March 2019).

For the U.S. housing market, the National Association of Realtors (NAR)
reported existing-home sales fell in March 2020, following significant gains in
February. March sales dropped 8.5 percent from February to a seasonally
adjusted annual rate of 5.27 million. All four major regions reported a
decrease in sales, with the West suffering the largest decline. NAR reported
that with current quarantine recommendations in place, fewer sellers listed
their homes on the market. While sales have declined, home prices were
still strong. According to NAR, the median existing-home price for all housing
types in March was $280,600, up 8.0 percent from March 2019 ($259,700), as
prices increased in every region. March’s national price increase marks 97
straight months of year-over-year gains.

My office also issues a Comprehensive Annual Financial Report (CAFR) as an
accounting supplement to the budgetary report. The CAFR includes financial
statements for all state funds and component units prepared in accordance with
Generally Accepted Accounting Principles (GAAP). From a balance sheet
perspective, the GAAP unassigned fund balance in the General Fund was a negative
$771.4 million as of June 30, 2019.

If you have any questions on this report, please do not hesitate to contact
me.